Animal Health Q2 Preview_JP Morgan

Animal health companies ELAN, ZTS and IDXX are expecting a relatively uneventful Q2 following a turbulent Q1. For ZTS, the company is expected to see more normalized results for its companion business after distributor destocking in Q1. The company's new product cycle is forecasted to offset any macro challenges in Europe, and it remains the favorite AH name into the Librela US launch. Meanwhile, IDXX is expected to have an uneventful quarter with healthy pricing supporting results, while ELAN is expected to be in line with estimates despite a $100mm headwind from the ERP system blackout.

ZTS is seen as well-positioned to achieve above-market growth due to its innovative portfolio, which includes derm, parasiticides, pain, and diagnostics. Simparica Trio is also expected to grow through competition in the parasiticide market, while there may potentially be upside for estimates of Librela, given the underestimated size of the pain opportunity. With additional investments in cardiology, renal, and cancer, ZTS is projected to generate durable high-single-digit revenue growth and low-double-digit EPS growth.

The investment thesis for Zoetis maintains an OW rating due to the company's leadership position, sustainable mid-single-digit top-line growth, and low to mid-teens EPS growth. The company's fundamentals and upward bias to estimates are expected to drive outperformance, despite its shares not being inexpensive. The December 2023 price target is $225 based on a DCF analysis, with key drivers being mid-single-digit top-line growth and incremental margin expansion. Risks to the rating and price target include increasing regulation on antibiotic use in healthy farm animals, a decrease in livestock herd-building, and broader economic volatility that could impact demand for Zoetis's products.

IDeXX should have solid 2023 results due to healthy price increases and gradually improving veterinary visit trends, particularly in 2H. The company is seen as well positioned to take advantage of favorable longer-term macro tailwinds within the animal health sector and generate sustainable double-digit top-line growth. Despite rebounding valuation, shares remain OW.

The investment thesis for Idexx is that they are the leader in the companion animal diagnostics market and positioned for significant revenue and EPS growth supported by macro tailwinds, new device placement opportunities, and cross-selling with their integrated offering. The December 2023 price target is $550, justified by a DCF analysis and multiples reflecting their growth profile and market position. Risks to this rating and price target include potential reversals in diagnostic utilization post-COVID-19, increased competition in the market, and a market-wide shift away from growth names.

ELAN shares look inexpensive even though the company remains below consensus on 2024-2025 EPS due to higher operating expenses, limited debt paydown, and elevated interest rates. The company's initial new launch contribution is also expected to be limited, but shares could re-rate higher on successful pipeline launches in 2H24-2025, which will require 2024 new product approvals and consistent execution.

The investment thesis for Elanco is cautious due to its uneven performance and range of headwinds like challenges in China, supply chain, slow ramp of new products, and price realization. While the company is making progress on its pipeline, these launches are not expected to contribute significantly to revenues until 2025+. The December 2023 price target of $13 is based on a DCF analysis with top-line growth and margin expansion being the key drivers. Risks include limited operating history, pipeline failure, inflation, higher costs, and high leverage. Upside risks include pipeline success and better-than-expected execution. Overall, there are better opportunities within animal health coverage than Elanco.